Do Budget Chains Bind State, or Is It Politics?

Jenifer Warren and Dan MorainTimes Staff Writers

As they struggle to cope with California's fiscal problems, budget planners say they are hobbled by a harsh reality: A sizable chunk of the state's income is off limits -- tethered to a panoply of rigid spending obligations.

Take, for example, money the state must spend to repay bonds that finance everything from new schools to parkland purchases. Failure to make such payments, which will total $2.9 billion in the coming fiscal year, is not an option.

Funds dedicated to employee contracts -- state firefighters, prison guards, mental health counselors and the like -- are also sacrosanct, unless employee unions agree to reopen them. Violate those agreements and lawsuits appear.

The use of billions of other state dollars is dictated by voter-approved ballot initiatives -- most notably, Proposition 98, which governs much of the state's school spending -- court decisions and the federal government, said Davis administration officials. Left over, they estimated, is about 10% of the budget they consider purely discretionary -- or easily shifted in a crisis like today's.

"It's true that a lot of state spending is really locked in," said Jean Ross, executive director of the nonprofit California Budget Project, which studies the impacts of the budget on the poor. "That's why we believe any solution to this problem has to involve revenue increases."

But are the walls of this budgeting box truly solid, or are the impediments more a question of politics?

Republicans and many Democrats believe that the constraints are overstated. State Sen. Tom McClintock (R-Thousand Oaks) speaks for many in his party when he says that the state does have wiggle room -- and could close the budget gap merely by rolling back spending by less than 10% for the next 18 months.

"You have to abide by the first rule of holes," McClintock said. "When you're in one, stop digging."

For years, he said, "policymakers have floated the excuse that so much of the budget is outside of their control." That, he argued, is "one of the great myths of the budget process."

The conservative senator is right. Virtually every constitutional and statutory spending mandate imposed on the state could be suspended by a two-thirds vote of the Legislature -- the same margin required to pass the budget.

The state could close its parks and sell the land. It could shutter the University of California and shift responsibility for higher education to the private sector.

California also could follow the lead of other deficit-stressed states -- including several led by Republican governors -- and relax sentencing laws or free certain nonviolent prisoners early, saving millions on incarceration costs.

Gov. Gray Davis could even scrap his own Department of Finance, which does the bulk of the work on state budgets.

But do Californians want to sacrifice their prestigious university system, lose parks or risk an increase in crime that might result if convicts get an early pass to the streets? And could a governor who pitched such solutions get votes for them in the Legislature?

Lobbyist Craig Brown, finance director under former Gov. Pete Wilson, said the issue largely boils down to which state functions and services "you define as mandatory."

In essence, state spending can be viewed as spreading across a spectrum. On one end are certain irrefutable requirements the state cannot neglect, such as debt payments. At the other are items politicians can choose not to fund, or fund at lower levels, if they want to risk the consequences -- such as arts programs.

Numbers defining those categories of spending are hard to come by. The California Budget Project is one of the few groups that has tried to quantify them.

Last summer, a report by the organization calculated that about 66% of the general fund -- the state's main pot of money -- is committed to annual spending the group defined as mandatory. The report's definition included school funding and child-welfare payments as mandatory, but not the Department of Corrections, state forest and fire protection, the state public defender or workers' compensation benefits.

Whatever the number, all parties agreed that California's most inflexible funding obligations include constitutional requirements, mandates by the federal government -- for Medi-Cal health insurance for the poor, for example -- and areas where courts have created hard and fast funding duties, such as an order that prisoners receive a certain standard of health care. Spokeswoman Anita Gore of the Finance Department said that in all, those obligations make up about 26% of the budget, according to a breakout from 2001, the most recent available.

One item in the must-fund category is the state's so-called debt service -- the amount it spends to pay off bonds for schools, prison construction and other projects. Those debt payments -- amounting to $2.5 billion this fiscal year -- constitute one of the fastest growing parts of the budget, projected to rise 16.8% over the next five years.

The California Constitution contains several more requirements, including a property-tax exemption for homeowners that saves each of them about $70 a year. Overall, the state cost of providing for that benefit is about $400 million a year.

Also immune to tampering is the state's obligation to pay its employees. In addition, the state must pay retirement benefits to certain groups, a sum that for teachers alone runs $900 million a year.

California voters bear part of the blame for handcuffing budget planners through their penchant for passing ballot initiatives, which often lock in certain levels of funding or restrict the way money is used.

The 25-cent-per-pack tax on cigarettes imposed by voters in 1988, for example, raises about $310 million a year, but it must be spent largely on anti-tobacco programs. When former Gov. Wilson and lawmakers tried to divert the money to more general health-care programs, smoking opponents sued and blocked the move.

Proposition 98, the 1988 measure that guarantees a basic level of funding to public schools and community colleges, also ties the hands of legislators -- to a point.

As it is, the state spends about 40% of its general fund on schools, or about $31.4 billion of the $78.4-billion general fund this year.

Legislators can suspend Proposition 98, but only by a two-thirds vote -- an unlikely prospect given the popularity of public schooling and the influence of the education lobby. The measure also permits lawmakers to cut spending when general tax revenue dips, but it requires the state to repay the schools in future years.

"Any effort to roll over the education community on this is not going to work," said Kevin Gordon, executive director of the California Assn. of School Business Officials.

The Medi-Cal health insurance program, which covers 6.4 million poor people, seems an obvious area for cuts because it costs $26.8 billion a year, about $9.8 billion of which comes from the state general fund.

State officials could eliminate any number of the program's optional benefits that are not required by federal law. Altogether, the state spends $2.6 billion on such extra benefits, which range from pharmaceuticals and hearing aids to heroin detoxification, acupuncture and hospice care.

But although the state could save money by trimming expenditures for medicine, officials know that such cuts have a fiscal consequence: If sick people stop taking medication, most become sicker and wind up in hospitals, adding to state costs.

Davis has proposed cutting several optional benefits, among them a category called medical supplies, which cost the state more than $150 million a year. But it is not clear that abolishing that program makes much sense. Federal law requires that the state provide insulin to diabetics. But if it cut optional medical supplies, the state no longer would pay for syringes diabetics use to inject insulin.

Of all the areas within the state budget where budget writers have some latitude, higher education ranks near the top.

State spending on higher education "in good years has done exceptionally well and, in bad years, it's gotten clobbered," said Patrick M. Callan, president of the National Center for Public Policy and Higher Education.

Part of the reason for that pattern is the absence of Proposition 98-style restrictions that safeguard state spending for the University of California or California State University systems. During the last recession a decade ago, general-fund spending on higher education fell from $5.83 billion in the 1990-91 fiscal year to $4.68 billion by 1993-94.

Still, lawmakers don't have a completely free hand with higher education. Union contracts provide some protection against cost-cutting layoffs; some programs get matching U.S. funds.

The whopping $650-million-a-year Cal Grant financial aid program might seem an inviting target, but it would be politically tough for lawmakers to slash. The program, which was trumpeted in Davis' State of the State address Wednesday, was vastly expanded in legislation signed just over two years ago that turned the grants into entitlements. It pledges to provide college aid for all low- and moderate-income students meeting financial need and grade-point average requirements.